It’s Time for the United States to Mandate Enhanced Scrutiny of Domestic Politically Exposed Persons

In February, former Baltimore mayor Catherine Pugh became the latest in the long line of Maryland politicians sentenced to prison for corruption-related crimes. According to the Department of Justice, Pugh sold copies of a self-published children’s book series to a variety of local organizations that already had or were attempting to win contracts with the city and state governments. Over eight years, Pugh and her longtime aide failed to deliver, re-sold, and double-counted the orders, squirrelling away nearly $800,000 into bank accounts belonging to two shell corporations registered to Pugh’s home address. Pugh, who did not maintain a personal bank account, used the funds to purchase and renovate a private home as well as fund her re-election campaign, among other activities.

These facts are classic red flags in the anti-money laundering (AML) world. Pugh would have had more difficulty executing this corrupt scheme, and might have been brought to justice much earlier, if the banks handling her illicit revenues had conducted the sort of enhanced customer due diligence and monitoring that financial institutions are required to perform on so-called “politically exposed persons” (PEPs), as well as their immediate family and close associates. While there is no uniform definition, PEPs are typically understood to be someone who holds a powerful government position, one that provides greater opportunities for engaging in embezzlement, bribe-taking, and other illicit activity. (Defining a PEP’s “close associates” is more challenging, but the category is generally thought to include someone like Pugh’s aide, who has the requisite status and access to carry out transactions on behalf of the PEP.) But U.S. financial institutions were not required to subject Pugh or her aide to enhanced scrutiny, because under the U.S. AML framework, such scrutiny is only obligatory for foreign PEPs, not domestic PEPs.

For many years, that was the standard approach internationally. But a new consensus is emerging that financial institutions should subject all PEPs, both domestic and foreign, to enhanced scrutiny. This position has been embraced by the Financial Action Task Force (FATF), the international body which sets standards for combating corruption in the international financial system, by the Wolfsberg Group, an association of the world’s largest banks, and by the European Union’s Fourth AML Directive. But far from joining the growing tide of domestic PEP screening, the United States seems to be swimming against it. The United States is one of the few OECD countries that does not require domestic PEP screening, and this past August, the Financial Crimes Enforcement Network (FinCEN), the primary U.S. agency tasked with investigating financial crimes, reiterated that it “do[es] not interpret the term ‘politically exposed persons’ to include U.S. public officials[.]”

This is a mistake. It’s time that the United States joined the international consensus by formally requiring enhanced scrutiny of domestic PEPs as well as foreign PEPs. Continue reading

How Rampant Corruption Has Brought Peru to its Current Political Crisis

Earlier this week, Francisco Sagasti was sworn as the new president of Peru. He is the 87th president in the country’s 200-year history, the fourth president in the current five-year presidential term, and the third president in a week.

The unusual chain of events that led to Sagasti’s presidency comprise one of Peru’s biggest political crises in recent history. On Monday, November 9th, Congress voted to remove President Martín Vizcarra for “moral incapacity” and appointed the president of Congress, Manuel Merino, to serve as interim president. This move incensed the Peruvian public; Vizcarra had enjoyed a public approval rating of nearly 60% even after Peru suffered one of the worst Covid-19 outbreaks in the world. Peruvians took to the streets, protesting Vizcarra’s removal and demanding the resignation of Merino, who was the driving force behind the impeachment proceedings. Police violence against protestors left two dead, more than forty missing, and at least ninety injured. Merino resigned five days into his tenure, and Congress named Sagasti – one of the minority of Congressmen who voted against Vizcarra’s impeachment – as interim president until the April 2021 elections.

This crisis represents the culmination of several growing tensions in Peruvian political life, including an increasingly antagonistic relationship between the executive and legislative branches, a widespread rejection of the political establishment and embrace of populism, and the enormous toll of COVID-19. But no issue is more central to this story than that of endemic corruption. Indeed, the intractable problem of corruption in Peru has been largely responsible for the current political crisis.

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Anticorruption Bibliography–November 2020 Update

An updated version of my anticorruption bibliography is available from my faculty webpage. A direct link to the pdf of the full bibliography is here, and a list of the new sources added in this update is here. As always, I welcome suggestions for other sources that are not yet included, including any papers GAB readers have written.

Three Measures to Put Corruption Enablers Out of Business

The most common way corrupt officials hide money is by stashing it in an “offshore vehicle.” The “vehicle” will be a corporation, trust, or other legal person. It is termed “offshore” because it will be organized under the laws of another country. Stolen funds and assets purchased with them can then be listed in the name of the offshore entity.

To create an offshore vehicle, the official will turn to someone with expertise in creating offshore entities and disguising their ownership: a lawyer, accountant or other professional who knows corporate and trust law and how to use it to hide the owner’s identity. The anticorruption community has dubbed these intermediaries “enablers,” for they enable corruption by providing corrupt officials with a way to enjoy the proceeds of their corruption.   A typical scheme is shown in the diagram below.

An official in country A wanting to hide assets first hires an enabler.  Although the enabler could be a professional in country A, hiring one located in another state makes it that much harder for local authorities to uncover wrongdoing. The enabler, shown in the diagram as located in country B (most often a wealthy country), then creates the offshore vehicle.  The enabler could have created the vehicle, in this case a corporation, in the enabler’s own country.

 But again, to make it harder for investigators to trace assets, the enabler will usually form the vehicle in still another country, here labelled C. As the diagram shows, to further frustrate efforts to track money flows the anonymous corporation (or shell or letter-box company — the terminology differs in different jurisdictions) will then open a bank account and buy real estate and perhaps art works or other personal or moveable property in still a fourth country.

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New Podcast Episode, Featuring Daniel Freund

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, my collaborators Nils Köbis and Jonathan Kleinpass interview Daniel Freund, a German representative in the European Parliament, where he serves on the Committee on Budgetary Control and co-chairs the Parliament’s Anti-Corruption Intergroup. Mr. Freund discusses the risks of corruption (or other forms of misappropriation) of EU funds and how to close these loopholes, as well as the use of conditionalities to promote the rule of law. Much of the interview focuses on the challenges posed by states like Hungary, where the Orban regime’s suppression of media freedom and judicial independence has created a situation in which Orban and his cronies are looting the state and enriching themselves to the tune of over one billion Euros per year, as well as entrenching their own power through a system of favoritism and crony capitalism. Mr. Freund discusses the challenges that the Hungarian situation poses for the EU, and the institutional mechanisms that the EU might use to respond this and similar situations.

You can find this episode here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

South Korea’s Moment for Chaebol Reform is Now

In late 2016, South Korea’s President Park Geun-hye was impeached and removed from office following revelations of massive corruption in her government. While the scandal included plenty of sensational and salacious material, the core accusations involved improper quid pro quo relations between the Park administration and several chaebols—the massive, dynastically controlled business conglomerates that are the cornerstones of the South Korean economy. Following impeachment, President Park and several senior officials in her administration were arrested, tried, and convicted for a variety of offenses, including bribery, abuse of power, and coercion. In the aftermath of this massive scandal, new President Moon Jae-in swept into office with a commanding majority and a pledge to clean up the mess by instituting strong anticorruption reforms.

However, most of President Moon’s anticorruption initiatives have received mixed reviews at best. For example, President Moon’s proposed Anti-Corruption Agency, though authorized by parliament in December 2019, has yet to be established, and has been roundly criticized for its potential to be used to suppress political opponents. And President Moon’s attempt to exert more centralized control over prosecutors was derided by critics as a retaliatory measure against prosecutors investigating government corruption. But perhaps the greatest disappointment of the Moon administration’s approach to anticorruption is its reluctance to target the root of the country’s most serious corruption problem: the unchecked power of the chaebols. Though President Moon announced chaebol reform as a platform priority, his actions since his election have borne little fruit.

That chaebols were at the center of the Park administration scandal is neither surprising nor unusual. Indeed, chaebols have been at the center of South Korea’s most significant grand corruption cases, and they are routinely implicated in scandal after scandal after scandal. But neither the chaebols themselves nor their senior executives face a meaningful risk of significant liability. Even when prosecutors bring cases, chaebols and their executives benefit from judicial leniency, a phenomenon that has been documented both anecdotally and quantitatively. Indeed, South Korean high courts are infamous for overturning stricter lower court sentences in favor of what has come to be known as the “three-five” rule, available exclusively for chaebol executives: a guilty chaebol executive typically receives a three-year prison sentence, suspended for five years, and subsequently commuted—meaning that the executive serves no prison time. There are two likely explanations for this unusual and counterproductive judicial leniency toward chaebols and their executives. Continue reading

Fighting Corruption in Chicago Requires Fundamental Systemic Reforms to City Government

Chicago, a city with an economy larger than that of countries like Thailand and Belgium, has won the title of the most corrupt city in America, with a total of 1,750 public corruption convictions between 1976 and 2018. (Los Angeles came in second with 1,547 convictions, while New York City (Manhattan) had 1,360.) There are numerous reasons why corruption is so pervasive in Chicago, many of which have roots in the city’s complicated history. But one particular institutional feature of Chicago city government appears to play a particularly important role: the system of so-called “aldermanic privilege” that allows local municipal representatives, known as aldermen, to operate their districts like discrete fiefdoms.

Chicago is divided into 50 political wards, each of which elects an alderman to represent the ward in City Council. Chicago differs from most other cities because an alderman can control virtually every aspect of zoning, licenses, and permitting within his or her ward. If, for example, a business needs a permit to hang a sign over its store or wants a license to sell liquor, the local alderman has to approve it. The aldermen also have broad authority to determine if a city block should be zoned as residential, commercial, or manufacturing, and to change zoning designations about how big a house can be, how many patrons a restaurant can serve, and what types of commercial properties are permitted. These powers, known collectively as aldermanic privilege, are not written anywhere in the city’s charter or ordinances. Rather, aldermanic privilege is a byproduct of Chicago’s longstanding political culture of deference and reciprocity: aldermen tacitly agree not to interfere with each other’s decisions, and the mayor cedes control of local wards to aldermen in exchange for the aldermen giving the mayor a wide berth on city-wide decisions. Some defend this system on the grounds that each alderman knows what is best for his or her own ward. And to be sure, aldermanic privilege can be used for good. But this system also fosters corruption, with alderman frequently using their power to extort bribes from local businesses. A particularly egregious illustration of such abuses came to light last year, when federal prosecutors charged Edward Burke, one of Chicago’s longest serving and most powerful alderman, with extortion and related offenses in connection with Burke’s alleged shakedown of local businesses in exchange for licensing and building permits. But Burke is hardly unique.

What can the city do about this problem? Last year, in part in reaction to the Burke Scandal, Mayor Lori Lightfoot successfully ran for mayor on a campaign that called for fighting corruption and ending aldermanic privilege. Mayor Lightfoot followed through shortly after her inauguration, issuing an executive order that stripped aldermen of their authority over permits and licensing decisions, and instructing city departments to stop deferring to aldermen’s wishes. The City Council also passed Mayor Lightfoot’s ethics package, which, among other things, gave Chicago’s inspector general greater powers to investigate aldermen, and banned alderman from having any outside employment that poses a conflict of interest.

This is a good start, but it’s insufficient to root out aldermanic corruption. Succeeding in that endeavor requires more fundamental reforms to Chicago city government. Two such reforms, individually or in combination, might help achieve this end:

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How Grand Corruption Threatens Liberal Democratic Institutions

As regular readers may have noticed, GAB has been inactive for the past week (that is, until Rick’s post yesterday). Apologies for the lack of content – as I’m sure you can imagine, the U.S. presidential election has been consuming my attention and that of most of our regular contributors. But now that the election outcome is clear (notwithstanding President Trump’s baseless claims of election fraud and the craven complicity of his Republican Party enablers), it’s time to get back to blogging. I suspect that much (though not all) of our content over the next couple of weeks will be related to the outcome of the U.S. elections—both backward-looking evaluation of the impact of the Trump Presidency on corruption in the US and beyond, and forward-looking considerations about the anticorruption agenda under the incoming Biden Administration.

Today’s post isn’t about Trump per se, but it’s loosely inspired by both certain aspects of his presidency and his current refusal to acknowledge and accept the outcome of the election. I want to say a few words about the ways in which corruption, particularly grand corruption at the highest levels of the government, can threaten to undermine the institutions of liberal democracy (free and fair elections, formal and informal checks and balances, the rule of law, etc.). To be clear, I don’t have in mind principally the ways in which politicians might engage in corrupt conduct to help win elections (for example, vote-buying, acceptance of illegal campaign donations in exchange for favors, diverting public funds for partisan purposes, etc.), though these are of course serious and important problems. Nor do I have in mind the broader and more diffuse “institutional corruption” associated with the excessive influence of concentrated wealth, though this too is a grave concern. Rather, I want to consider how grand corruption in the highest levels of government may threaten to erode or subvert (explicitly or de facto) the basic institutional structures of liberal constitutional democracy.

Nothing of what I have to say on this topic is original; it’s all drawn from existing literature, and the arguments are likely familiar to many readers. Still, I thought it might be helpful to highlight three ways in which unchecked grand corruption may contribute to democratic backsliding: Continue reading

Can Trump Be Prosecuted?

President Trump and diehard supporters continue to maintain on Twitter, in interviews, and at press conferences that tens of thousands of votes at the November 3rd election were fraudulently cast and that once these ballots are excluded, he will be declared the winner. But under American law only a judge can invalidate a vote, and unlike Trump sympathizers, judges demand clear and convincing evidence of voter fraud — something Trump has yet to produce (here) and is quite unlikely to be able to (here). So Joe Biden will indeed take office January 20.

While President Trump’s term in office ends at noon that day, his legal problems will not.  Indeed, they are likely to accelerate.  For whatever immunity he enjoyed from prosecution as a sitting president ends too. 

By far the greatest threat Trump faces are the investigations led by Manhattan District Attorney Cyrus Vance, Jr. and Letitia James, New York’s attorney general. Both are independently investigating criminal charges related to Trump’s dealings while a New York businessman. James may also be continuing her investigation of abuses involving Trump’s now defunct New York charity. The charges both are pursuing involve violations of New York state law, meaning a presidential pardon would do him no good. It excuses only violations of federal law.  

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New Podcast Episode, Featuring Claudia Escobar

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, I interview Claudia Escobar, a former Magistrate Judge on the Court of Appeals in Guatemala. Judge Escobar resigned her position in 2014 after exposing corruption in the judicial selection process. Judge Escobar secretly recorded a meeting with representatives of the then-ruling party, who indicated that she would be promoted if she ruled in favor of the government in an important upcoming case. Judge Escobar subsequently released the recordings, and fled Guatemala for fear of reprisals. Since then, she has been working in the United States as a researcher, consultant, and advocate, with a focus on fighting judicial corruption in Guatemala and elsewhere in the Americas.

Our interview begins with a discussion of how Guatemala’s history, including more than 36 years of civil war, has created a culture of impunity and insecurity, and how the challenges this legacy poses to the creation of a genuinely impartial and honest judicial system. Judge Escobar describes many of the problems with Guatemala’s current judicial appointment system, and the associated corruption risks. Our conversation then turned to the impact and legacy of the UN-backed anti-impunity commission, known by its Spanish acronym CICIG. Judge Escobar offers her perspective on the fight against corruption under former President Jimmy Morales and new President Alejandro Giammattei, as well as a more general discussion of the politics of anticorruption in Guatemala and the prospects for future progress on this issue.

You can find this episode here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.